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Anna Cuevas is the National Urban League's new Consumer Advocate, as part of our 2015 Financial Empowerment series. Learn more about Anna here.
First-time homebuyers have many questions. Because those questions will impact the decisions you make, you should seek answers that will guide you through the home buying process. The questions below are some that are frequently asked by first-time homebuyers.
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Is it better to rent or buy?
The decision to rent or buy is an individual one based on your financial situation and your wants and needs. Renting is a preferred option for those who don't have the down payment or credit required to be approved for a mortgage. Renting is also suggested for those who don't anticipate staying in a home for at least five years.
On the other hand, buying a home has its advantages. First, it is an investment that often increases in value. While rent rates continue to rise, your mortgage payment will usually stay the same (depending on the type of mortgage). Home ownership also offers tax advantages and deductions, including interest, property taxes and insurance. Over time, a homeowner builds equity in their home, providing them with a worthy asset. In the long-term, once a mortgage is paid in full, homeowners are free of monthly payments, whereas renters will be required to continue to pay rent as long as they stay in a residence.
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I have bad credit and only a small down payment. Can I buy a home?
There are programs to assist potential first-time homebuyers in situations like yours. Federal mortgage programs and incentives are available. Contact a lender, realtor, and/or a local housing counseling agency for assistance and programs available in your state and community.
The good news is that even if your credit is poor or you have no down payment, you can take steps today to make improvements in both areas. Get a copy of your credit report for free at www.AnnualCreditReport.com and begin to pay down your debt while paying your bills on time. In addition, create a budget and set aside funds on a regular basis to increase your down payment. It will take time, but the effort will pay off.
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Should I see a housing counselor?
The US Department of Housing and Urban Development (HUD) recommends homeownership counseling for potential and existing homeowners. Trained counselors can offer you advice and guidance in the process of purchasing a home and navigating the mortgage marketplace and also provide information and coaching on financial planning to help you prepare. You’ll learn about the documents and players involved in the home purchase process and potential resources available for first-time homebuyers and get help in accessing these resources.
This counseling is free and very beneficial, especially for first-time homebuyers as they navigate the mortgage process and learn to shop for their best options. Your housing counselor is your advocate in navigating the biggest purchase most people will make in their lifetimes. To find a HUD-approved housing counseling agency in your area visit the HUD website.
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Should I get prequalified?
Prequalification will take the guesswork out of applying for a mortgage and purchasing a home. It can also help you shop around for the best mortgage option for you. You'll find out if you qualify and the maximum purchase price and monthly payment you can afford. To get prequalified, visit a lender in your area, who can assist you with understanding the various types of mortgages available, the down payment requirements, monthly mortgage payment, and approval process. Pre-purchase housing counseling can also help guide homebuyers and answer any questions you may have about what to expect during this process.
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Are there special programs to assist first-time homebuyers?
Yes. Again, that depends on your lender, the type of mortgage, and local, state and federal programs at the time of the purchase. Ask your housing counselor, real estate agent, lender, or local housing and community development agency about available resources in your area. If you're purchasing a home insured or owned by the government, there may be additional advantages and incentives that make home ownership more affordable. Contact a housing counselor for information on programs available in your area or the agency in question (such as the Department of Housing and Urban Development, Fannie Mae, Freddie Mac, or Veteran's Affairs for assistance).
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What is a HUD home?
The Housing and Urban Development program provides mortgage insurance to lenders. When a homeowner cannot make their monthly payments, the home is foreclosed by the lender. HUD then pays the lender the outstanding balance of the mortgage, and HUD becomes the owner of the property. To recoup their costs, HUD places the home back on the market with the intent to sell it quickly. Often, this can mean substantial savings or price reductions for HUD owned homes, which can make them very attractive to first-time homebuyers. To find a HUD home or other federal agency-owned home, go to the HUD website.
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Should I use the services of a real estate agent?
A real estate agent or broker is experienced in the legal and financial requirements of home buying and selling. They can offer information about property taxes, government services, schools, and other amenities an area might have to offer, too. A realtor can also help you determine the types of mortgages available. They are a great source of information and assistance, from helping you find a home to navigating buyers through the offer and counter-offer / approval process, and assisting in making sure that the closing goes smoothly. This assistance comes to buyers at no cost as it is the seller who pays the realtor, not the buyer.
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How much money will I need in order to buy a house?
A homebuyer will need a cash down payment when buying a home, but the amount is dependent on several factors. First, the down payment is a percentage of the purchase price, usually 10 to 20% for a conventional mortgage. However, FHA and other loans offered through Fannie Mae and Freddie Mac for instance may require much less and currently as low as 3% down. “Earnest money” will also be requested; these funds are a deposit made by the buyer when they make an offer to indicate that they are serious about the offer and believe they will qualify for the necessary mortgage. This can be as little as $500 or as much as $5,000. Third, buyers may have to pay closing costs, which include fees the lender charges, tax and insurance escrows, and other costs (typically, 3 to 5 percent of the purchase price). Some lenders may also require buyers to have savings equivalent to two months income in addition to these costs as an extra measure to protect them in the event of unexpected repairs or a temporary reduction in income after the closing.
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How much will my monthly payments be?
Only a lender can provide an exact answer to this question. The amount will vary, depending on the type of mortgage you choose, the purchase price of the home, the term, or number of years of the mortgage, the interest rate charged, the annual property taxes, and homeowner's insurance. Note, however, that different lenders may offer options that could result in savings or increased monthly payments. For example, a lender may offer a mortgage with reduced interest rates under specific circumstances or you may have to pay for private mortgage insurance if your down payment is less than 20 percent of the purchase price.
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How long does the mortgage approval process take?
The amount of time it takes for approval and processing of a mortgage depends on the lender and the availability of documents necessary to process it. A lender can usually let you know if you're prequalified for a mortgage and the amount in a relatively short period of time. The actual approval process takes longer and typically takes between three and six weeks.
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What documents will I need to provide to the lender?
This is where you can save time and make the process go smoothly and efficiently. Be prepared when you apply for a mortgage by having the necessary information and documents on hand. You'll be asked for:
--- Copies of your Social Security card
--- Bank statements (checking and savings) for the last six months
--- Proof of assets, such as stocks, 401k plans
--- Your most recent paycheck stub
--- A list of all your current debts and balances owed, with account numbers
--- Copies of income tax returns for the past two years
--- Employer information and contact information
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I've been approved for a mortgage. What can I expect at the closing?
Who attends the closing may differ by locations, however, generally, at your closing you will meet with your attorney or closing/escrow agent, a representative from the title company, a notary public, and sometimes your real estate agent, your lender's agent, and an agent representing the seller or the seller's bank. At this meeting, the formal process of transferring ownership of the property will take place. You and the seller will each be asked to sign many documents involving the transfer of funds and ownership. Because these documents are legally binding, it's important that your attorney has reviewed them carefully and thoroughly. It’s also important that you fully understand the documents and the terms of your mortgage before you complete your closing. When the funds have exchanged hands and the paperwork is signed, the sale is complete and you’ll receive the keys to your new home!
